In doing business, individuals and companies usually earn interest income. These interests income may be derived from investments and deposits that are often called in accounting as financial instruments. These interests might be derived from deposits in banks and other financial institutions, investments in corporate bonds, investment in government securities (such us treasury bills, treasury bonds, treasury notes), loans receivables, and other sources.

The question is, what is the tax treatment for these interest income. Are they subject to final withholding tax? creditable withholding tax? regular corporate income tax? or tax exempt? What is the appropriate tax rate? 20%, 25% 30%, 35%, etc?… Many individuals and companies have dilemma on how to compute for the tax due and how are these be paid.

Tax treatment of interest income derived from government debt instruments and securities

Tax treatment of interest income derived from long-term deposits or investment certificates

Tax treatment of interest income derived from currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements

Tax treatment of interest income derived from a depository bank under the expanded foreign currency deposit system

Tax treatment of interest income derived from offshore banking units

Tax treatment of interest income derived from all other instruments

RR No. 14-2012 is effective 15 days following the complete publication in a newspaper of general circulation

While tax treatment was clarified by RR No. 14-2012, the accounting treatment for these interest income may be a bit complicated. The recording of tax for accrued interest may not be as straight forward as we think. Interest income subjected to final withholding tax are also considered reconciling items in the regular corporate income tax computation and may make our computation a little bit complicated than we expected. We should be mindful that there are also various disclosure requirements in the financial statements on taxes which are affected by the tax treatment of interest income. To ensure that you have appropriately accounted for all of these matters, we strongly suggest you to consult your professional accountants.

On November 22, 2012, the BIR issued Revenue Memorandum Circular (RMC) 77-2012, to clarify certain provision of the RR No. 14-2012. To download a copy of the RR No. 14-2012 and RMC 77-2012 click links below:

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Orlando CalundanOrlando Calundan is a CPA who has exposures in FS audit of entities in various industries such as real estate, food/restaurants, manufacturing, service organizations and BPOs, automotive, holding/investment companies and more. He also has exposure on internal audit engagements.